How Does Appraisal Work? A Step-by-Step Guide to the Commercial Appraisal Process

pexels-anna-shvets-5324973Whether you’re a part of the commercial real estate industry, a homeowner, or an appraiser yourself, most people have at least a vague idea of what appraisal is - the process of determining the market value of a given property. Less commonly understood, however, is the complex and painstaking process that helps determine that value, particularly for a commercial asset. What does a commercial real estate appraiser do?

From an industry perspective, commercial real estate appraisal is a process where a trained and licensed professional assesses the value of a commercial property according to the intended use and user(s) of the final user. It might be a storefront, an office building, vacant land, or any other property that can be considered commercial as opposed to residential. Many people seek out appraisals when they are looking to buy or sell a property or for tax appeals. Valuation is a key component of any real estate negotiation.

It’s important to work with a trained and licensed commercial real estate appraiser. There are lots of factors that can affect the final valuation of a property, and you may not be privy to these influences. An appraiser has access to specialized databases and understands how to parse and select which information is relevant. For instance, they will check the tax history, zoning, deeds, property damage and potential obsolescence, and other onsite elements to inform their final result. You can use the resulting valuation amount in court, to sell a property, or to change insurance.

Let’s take an in-depth look at the commercial appraisal process. From your first call to the appraiser to your final valuation, here is a step-by-step guide to how a commercial appraisal works:

Hiring an Appraiser

It’s essential that you find a commercial (as opposed to residential) real estate appraiser to evaluate your commercial property. Residential appraisers have different training requirements. Contact them and explain the reason you need a valuation. They will ask you a few questions about the location and history of the property. If you’d like to read an interview with a real commercial appraiser, check out this post featuring Jeffrey Harris of Harris Property Advisors.

First Step: Reviewing the Documentation

Now you need to share any documentation you have with them. Don’t try to fool them into valuing your property higher than it’s worth. They know all the tricks in the book. Appraisers are particularly bound by their integrity to perform accurate valuations. They know that they might be summoned to court if there’s ever a property dispute, so they make sure they set a number they can back up with proof.

Gather up any documentation related to income statements, property taxes, renovations, and more. Don’t withhold anything! Simply be upfront about the property’s history and let your appraiser do their job. If you don’t have a required document, let them know. It happens frequently and your appraiser can recommend ways to solve the problem.

Second Step: Site Visit

When most people think about appraisals, they imagine a site visit that includes an in-person inspection of the property. This is an important part of the valuation process. Depending on the size and specifics of the commercial property, your appraiser may bring a team. It may take as little as one hour or longer. They may use a smartphone or tablet with the Valcre mobile app to collect and organize their findings.

They will be looking to verify information in your documentation. They will also utilize their training to spot problem areas (and positive areas) that could alter the final valuation of the property. Don’t worry, they’re not there to judge your mess or which end tables you chose for the waiting room. They are primarily examining the structure itself.

Third Step: Research & Analysis

Now they must conduct the research and analysis portion of your valuation process. Your appraiser needs to review zoning records and neighborhood demographics to assess the value of your property. Are there any zoning restrictions or violations? What do the data trends indicate about the future viability and value of your property? If it’s a rental building, what are the vacancy rents, and what indications are there that rent is increasing (or decreasing) in your area?

This research can take weeks or months, depending on the size and complexity of the property. The commercial appraiser will go through records of public ownership, tax data, and other databases to compare and corroborate information. In combination with their onsite assessment, all of this information goes into the final calculation of your property’s value.

Final Step: Valuation

Finally, you’ll receive the valuation report. If the appraiser has used the cost approach, the value will be expressed as the amount it would cost to build a replica of your property. This is typically used to evaluate newer properties. Another common assessment approach is income capitalization, which is primarily used to assess income-generating properties like office buildings or any other leased property. Your valuation will take into account how much money your property could generate over its lifetime. A market sales comparison approach is the most common type, and it examines similar buildings and sales figures to determine the market value of your property.

Now that you have an official valuation in hand, you can thank your appraiser for a job well done. You are now in a strong position to negotiate a sale of your property.

Valcre is an industry-leading tool that helps commercial appraisers increase their productivity and improve outcomes for their clients. Contact us for more information, if you’d like to explore our mobile app, or if you want to learn more about the commercial valuation process.